CHICAGO Alcoa Inc. is cutting costs to cope with steep aluminum price declines even as the company predicts that downstream demand will surge in coming decades.
Aluminum demand has grown by about 8 percent per year in recent years and is expected double over the next century, implying growth of roughly 6.5 percent per year, Alcoa Inc. chairman and chief executive officer Klaus Kleinfeld said at a recent shareholders meeting.
"The aluminum market is not a bad market," at least not when it comes to the "physical side" and end markets, according to Kleinfeld. "There is a different story on the pricing side," he conceded.
As aluminum prices remain low, the company continues to move away from commodity-grade material where possible and focus on value-added products, Kleinfeld said. Only 25 percent of Alcoas profits came from value-added products in 2003, a number that had jumped to 71 percent by 2012, he said. "We have really changed the portfolio pretty drastically," Kleinfeld said.
Aerospace accounted for almost one-third of the $13.2 billion in value-added revenue Pittsburgh-based Alcoa reported in 2012, Kleinfeld said. The sector is forecast to see an 11.6-percent compound annual growth rate between 2012 and 2015 thanks in part to eight-year backlogs at Chicago-based Boeing Co. and Toulouse, France-based Airbus SAS, he said. That demand will last "even if the economy wobbles a little bit," and Alcoa is well-positioned when it comes to both metallic and composite planes, Kleinfeld said.
Annual growth rates for the overall automotive sector are estimated to be about 2 to 3 percent through 2015, although the North American aluminum automotive sheet market alone is expected to grow at a whopping annual growth rate of between 30 to 35 percent, he said. Thats because the North American auto industry is "aluminizing" in response to growing demand from consumers and policymakers for lighter, more fuel-efficient vehicles, Kleinfeld said.
But while the outlook for downstream markets is good, Alcoas upstream business is "tremendously" under pressure from low metal prices, Kleinfeld said.
"Unfortunately, (cutting costs) was more than necessary because (the impact of lower metal prices) was very, very harsh last year," Kleinfeld said. The average cash price for aluminum on the London Metal Exchange fell 15.7 percent to $2,021 per tonne in 2012, translating into an approximate $1-billion hit on profits, he said.
Last week, Alcoa said it was considering cutting as much as 460,000 tonnes of smelter capacity over the next 15 months due to the low aluminum prices (amm.com, May 1).